I've reflected about the many buy-sell agreements I've reviewed in recent years. From the list, let's focus on four that have issues with either what appraisers call the level of value or with appraiser qualifications. Any facts have been altered, of course, to protect the innocent (or guilty) as the case may be.
- Family business, latter-1980s . This agreement provides a put to family members at either an agreed-upon price (which did not exist currently) or based on an appraisal process. There are issues in the appraisal-selection process and in the definition of value that would render a valuation process involving as many as three appraisers problematic.
- Family business, mid-1980s. A family member died and the buy-sell agreement was triggered. Everyone assumed that the valuation called for in the agreement was at the nonmarketable minimum level, since the interest involved was about 30%. Upon reading the agreement, it is clear to me that the valuation language called for an enterprise value, without minority interest or marketability discounts.
- Closely held business, early 2000s . The agreement calls for an appraisal of the Company, ie, at an enterprise level, but then leaves to the appraiser the decision of whether any valuation discounts apply to a particular shareholder's interest. There are no agreed upon qualifications for the appraisal selection process. If a dispute arises, up to two additional appraisers could be used, who could also exercise their judgment regarding whether valuation discounts apply.
- Closely held business, recent vintage . This agreement was sensitive to defining an enterprise value in the valuation process, but had later language that raised questions about this conclusion. With no qualifications established for the appraisal selection process, any valuation process is at consideration risk relating to the selection of the appraiser (s).
What's the point of all this?
- If you have a buy-sell agreement, get it out and read it.
- If you have clients with buy-sell agreements, ask them to let you read the agreements on their behalf.
- Think about the valuation process when you do.